Federal Reserve Board Issues Final Phase of Regulations to Implement the Credit Card Act

The Federal Reserve Board ("FRB") issued its third and final phase of regulations to implement the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "Act") on June 15, 2010. The new regulations become effective August 22, 2010.

This final regulation addresses the reasonableness and proportionality of penalty fees and charges (implementing new TILA Section 149) and creditors' reevaluation of rate increases (new TILA Section 148). The first phase of regulations addressed advance notice of rate increases and significant changes in terms (new TILA Section 127(i)) and provisions regarding the amount of time that consumers have to make payments (revised TILA Section 163) and became effective on August 20, 2009. The second phase of credit card regulations, which addressed the majority of requirements under the Act, including provisions regarding interest rate increases (revised TILA Section 171), over-the-limit transactions (new TILA Section 127(k)) and student cards (new TILA Sections 127(c)(8), 127(p), and 140(f)) became effective February 22, 2010.

Specifically, the third phase of the regulations, among other provisions:

• Permits a card issuer to impose a fee for violating the terms of an account if the card issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the card issuer as a result of the particular violation
• Creates a "safe harbor" for credit card issuers: a penalty or fee may be imposed that does not exceed $25 for paying late or otherwise violating the account terms, unless the consumer has repeatedly violated the agreement. The creditor may impose a $35 fee for any violation of the same type within the next six billing cycles. There is a special rule for seriously delinquent charge card accounts. If the required payment has not been received on a charge card for two or more consecutive months, a penalty equal to 3% of the delinquent balance may be imposed.
• Despite the "safe harbor" amounts discussed above, the rule prohibits the charging of penalty fees that exceed the dollar amount of the consumer's violation (e.g., limits a penalty fee to $20 for failing to make a $20 minimum payment)
• Bans inactivity fees, fees for transactions that the card issuer declines, and fees for closing accounts
• Prohibits the imposition of multiple late or penalty fees (e.g., returned check fee) based on a single late payment or violation
• Requires card issuers that have increased interest rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to decrease the rate. Card issuers must perform this review no less than every six months until the rate is reduced to the rate in effect prior to the increase. The reevaluation must be based on the same factors on which the rate increase was originally based or on a review of the current factors the card issuer considers when determining the rate applicable to similar credit card accounts.

The final rule also addresses certain disclosure changes, including changes to the account-opening disclosure, change-in-term disclosures as well as the periodic statement. These disclosure changes reflect the fee restrictions imposed by the new rule.

If you have any questions regarding this Consumer Financial Services Alert or the Act and its implementing regulations, you may contact Richard Gottlieb, director of the Financial Industry Group, at 312-627-2196, or Arthur Axelson, the author of this alert and leader of Dykema's Financial Services Regulatory Practice, at 202-906-8607.

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